Transcript: Wednesday, August 13, 2014

NBR Thum ANNOUNCER: This is NIGHTLY BUSINESS REPORT with Tyler Mathisen and Susie Gharib.

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Cisco`s big challenge. The Dow component reports better-than-expected earnings but disappoints investors with weak forward guidance and more job cuts.

SUSIE GHARIB, NIGHTLY BUSINESS REPORT ANCHOR: Marked down. Macy`s (NYSE:M) considered one of the stronger names in retail, surprises the street with an earnings miss and a weak sales outlook, leading to more questions about the consumer.

MATHISEN: Cashing in. America`s graying population means big opportunity for some major corporations. Tonight, the names investors need to know in the third part of our series, “Aging in America”.

All that and more tonight on NIGHTLY BUSINESS REPORT for Wednesday, August 13th.

GHARIB: Good evening, everyone.

On Wall Street, every little bit helps and a strong stock rally today pushed the Dow Jones Industrial Average into positive territory for the year, up by a fraction but still on the plus side.

But words of warning after the close from one of those Dow stocks could temper the tone of trading tomorrow. Cisco (NASDAQ:CSCO) Systems is the closely watched tech bellwether company and on its earnings conference call, the CEO issued disappointing earnings guidance and announced plans to cut 6,000 jobs.

As for its quarterly results, the computer networking equipment maker topped Wall Street`s forecast by posting earnings of 55 cents a share. That was 2 cents more than estimates. Revenues also came in better-than-expected, even though they were basically flat from a year ago as the company faces tough demand for its new line of high-end switches and routers.

Cisco (NASDAQ:CSCO) shares initially rose but then reversed course on those comments from the conference call.

MATHISEN: Cisco (NASDAQ:CSCO), along with several other U.S. tech giants, has always looked at China for feature growth. But now, doing business with Beijing is becoming more difficult and one of Cisco`s biggest challenges.

Josh Lipton has the story.

(BEGIN VIDEOTAPE)

JOHN CHAMBERS, CISCO CEO: We have the opportunity to get to see what is going on in every country.

JOSH LIPTON, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): Cisco`s CEO John Chambers knows that China represents a big opportunity for the tech bellwether with an IT market that`s growing strongly. The problem is whether the Chinese government is going to allow Cisco (NASDAQ:CSCO) to capitalize on that opportunity.

China now accounts for about 5 percent of Cisco`s total revenue or some $2 billion, but business there has been tough with orders dropping quarter after quarter.

What`s the problem in China? Call it the Snowden effect. Cisco (NASDAQ:CSCO) executives say disclosures about the surveillance activities by the NSA are spooking Chinese customers, and the Chinese state media is stoking those concerns, saying that Beijing should punish what it calls the pawns of the U.S. government, specifically pointing to Cisco (NASDAQ:CSCO), as well as Microsoft (NASDAQ:MSFT), Google (NASDAQ:GOOG) and Yahoo (NASDAQ:YHOO).

Analysts say China`s real intention in this war of words is promoting Chinese tech companies over foreign rivals.

CRAWFORD DEL PRETE, IDC: This is an opportunity to say we have no concerns about our products and we understand exactly how those are made. And at the same time, it`s a way, you know, for China to sort of promote their own indigenously made products and try to drive those products forward.

LIPTON: And it`s not just Cisco (NASDAQ:CSCO) that`s in Beijing`s crosshairs. IBM, Microsoft (NASDAQ:MSFT) and Qualcomm (NASDAQ:QCOM) also are facing challenges in the Chinese market.

(on camera): American tech companies are counting on rapid growth in China with an IT market there that`s expected to reach $111 billion this year. But given how Beijing is now acting, that doesn`t look like something a lot of companies are going to be able to deliver to investors any time soon.

Josh Lipton, NIGHTLY BUSINESS REPORT, Silicon Valley.

(END VIDEOTAPE)

GHARIB: More now on today`s action on Wall Street. The major averages posted some sizable gains and that`s despite a slump in retail stocks. Investors were discouraged that July retail sales stalled, absolutely no gain. This was the weakest report since January.

But that increase speculation that the Federal Reserve won`t be forced to raise rates sooner than anticipated and with risks in the Middle East and Ukraine quiet, the Dow rose 91 points in positive territory for 2014. The NASDAQ was up nearly 45, that`s a gain of 1 percent, and S&P added 13 points.

MATHISEN: That weakness in retail stocks today came after Macy`s (NYSE:M), considered to be one of the bluest of the blue chip names in retail, posted disappointing earnings and a weak full-year outlook and that happened before trading began today and when it did, shares of Macy`s (NYSE:M) moved 5.5 percent lower and took a lot of other big retailers down for the ride. And that`s leaving many to wonder, what is going on inside Macy`s (NYSE:M) and with American consumers?

Courtney Reagan looks for some answers.

(BEGIN VIDEOTAPE)

COURTNEY REAGAN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): It hasn`t been an easy year for retailers, even the stronger ones. Macy`s (NYSE:M) reports lower-than-expected earnings and sales and lowers the sales expectations for the full year. Macy`s (NYSE:M) executives say many consumers are still not feeling comfortable about spending more in an uncertain economic environment.

MATTHEW BOSS, JPMORGAN: I think Macy`s (NYSE:M) continues to stand above the peers. I think it`s an unstable backdrop for the consumer. We`ve got a lot of things against us. We have durable shifts. We`ve had weather out of favor. So, we`ll see what happens in the back half.

REAGAN (on camera): It`s the broader economic conditions that seem to hit on the heart of what is going on with the consumer. PWC`s chief retail strategist Thom Blischok says the recession may have officially ended years ago, but consumers are still concerned about the cost of living, jobs, economic stability and what the future will hold.

THOM BLISCHOK, PWC STRATEGY`S CHIEF RETAIL STRATEGIST: The future as we see it is not uncertain, but it is — it is a bit cloudy in that we don`t see a huge economic change necessarily. What we do see is the consumers holding back and trying to ensure that they live a very safe, comfortable life.

REAGAN (voice-over): However, Wolfe Research says what`s ailing retail isn`t consumer`s fault. The firm is tracking the consumer as if it were a company. Wolfe is calling it average Joe, reporting a quarterly income statement and balance sheets. The latest economic data for Average Joe shows wages are up 4.6 percent, disposable income and spending are up 4 percent. Consumers may just not be spending those increases in traditional retail.

And the shift has happened over time. The American consumer is spending on their homes, health care, education, premium food and subscription services, like cell phone and data plans, movie streaming and cable, as well as Internet bills. All things not sold by traditional retailers.

For NIGHTLY BUSINESS REPORT, I`m Courtney Reagan.

(END VIDEOTAPE)

GHARIB: Wall Street regulators are looking into so-called alternative mutual funds. According to “The Wall Street Journal”, the Securities and Exchange Commission is investigating this new kind of investment vehicle that mirrors strategies used by hedge fund, investing in private debt or by shorting stock. They`re targeted for individual investors giving them access to assets that were once exclusive to wealthy investors.

MATHISEN: These alternative mutual funds have become extremely popular as investors poured tens of billions of dollars into them, despite steep fees.

Alan Haft joins us now to discuss the pros and cons of owning them in your portfolio. He`s a partner with Kelly-Haft Financial.

I know, Mr. Haft, these funds have their backers and they have their pros and cons. But for the life of me, I can`t understand why someone would want to invest in one of these funds at the prices they typically charge and at the performance they so far have been able to generate.

ALAN HAFT, KELLY-HAFT FINANCIAL PARTNER: Well, look, Tyler, when somebody hears the word “hedge fund”, it`s enticing because traditionally hedge funds mean higher returns. So, the higher returns to a lot of people`s minds will offset the higher fees, so the performance is paramount for most investors and in addition, hedge funds in a lot of people`s minds will compliment an already diversified portfolio and generally new asset class.

GHARIB: And so, from what I understand the way they work, Alan, is that you do well in these funds when the markets, you know, correcting, but you don`t do so well if the market was rallying. Is that the case?

HAFT: Well, the allure of the hedge fund is obviously, especially in the mutual fund instrument, that they can actually short the market, which you can`t do in other mutual funds, but a good hedge fund will make money in an up-or-down market, doesn`t make a difference.

GHARIB: But they have — but hedge funds, as a group, correct me if I`m wrong here, Alan, over the past several years, hedge funds as a group have typically way under-performed the market, which may be the point you`re saying, because the market is generally going up, it`s not the time most hedge funds have done well. There are exceptions, obviously.

HAFT: Sure, no, listen, I would agree with that. Generally speaking, hedge funds, by and large, have underperformed the market. But right now, I think part of the allure of people going into the funds is because of the perception that the market is due for a correction. So, if the market is due for a correction, and you want to stay in the market, where do you go right now?

So, a lot of people pouring money into these funds, thinking that a correction is coming up and that the hedge fund should finally out perform the market.

GHARIB: So, who are these funds for? Do you have to still be — even though they are for individual investors, do you still have to have a sizable portfolio, or can anybody sign up for them?

HAFT: Not anymore. The traditional hedge fund will take a credit to investors, somebody who has a million dollars of liquid net worth or above, generally speaking. So what these funds are trying to attract now are the Main Street investors that are not accredited, that can put in a very small amount of money and not have to be accredited to go into them.

MATHISEN: All right. Let me — let me understand what these funds do. They use leverage. They invest in alternative investments, like derivatives and so forth. They short the market.

Give me more of that. And what do they charge for the privilege of this?

HAFT: All right. So, the hedge funds, there are basically three components what a fund can do. It can leverage, which means borrow money to increase the returns, which by the way increases the risk on the portfolio. They can use most derivative investments and they can also short the market. So, if the market is going down, they can profit from the declining market.

The fees — the published fees somewhere between 3 percent and 5 percent. But as a lot of people know, there is additional fees inside a mutual fund that aren`t necessarily disclosed. So, the fees — I`ve done some hard core research on some of these funds and I`ve seen fees as high as 7 percent in quite a few of them.

GHARIB: Real quickly, just we have a little bit of time left. You`ve been very diplomatic in all of your answers, talking about the pros and cons. But when your clients come to you and say, look, I want to go into one of these alternative funds, what do you say? What`s your view on them?

HAFT: You know, everybody is different. Some people, I think it`s appropriate for, especially those who want to diversify a little bit more, in an asset class that doesn`t exist in that portfolio right now. But my paramount concern of these funds is that a traditional hedge fund can do things a hedge fund inside the confines of a mutual fund cannot.

So, I always warn people — listen, if you think you`re going to invest actually into a hedge fund, you`re really not actually in a hedge fund, you`re in something that looks like a hedge fund, acts like a hedge fund but be wary of the performance. You may not get as much bang for your buck as you think you might.

MATHISEN: Hedge fund light? Alan?

HAFT: I`m sorry, what?

MATHISEN: Hedge fund light?

HAFT: Hedge fund light, there you go. Exactly. Right.

MATHISEN: Alan, thank you very much for your help on this.

HAFT: Thanks for having me.

MATHISEN: Alan Haft with Kelly-Haft Financials.

And coming up, why companies like Google (NASDAQ:GOOG), Verizon (NYSE:VZ) and Campbell`s Soup are also working in the landlord business. That`s next.

(MUSIC)

MATHISEN: Well, the old cliche is that nothing is certain but death and taxes. But apparently, that`s not exactly true for some of the nation`s most profitable companies. Twenty companies in the S&P 500 paid no taxes last year, zero, none, including Dow component Merck (NYSE:MRK), which took in $2 billion in profit last quarter, most of it in countries with a lower tax rate than here on the U.S.

Also on the list, General Motors (NYSE:GM) and the medical device maker Thermo Fisher. For a full list of those companies that paid nothing, head to our Web site, NBR.com.

MATHISEN: Some other big corporations are taking advantage of a different kind of tax break, low income housing credits, and they are benefitting by financing new and reconstructed apartment buildings.

Kayla Tausche has the story.

(BEGIN VIDEOTAPE)

KAYLA TAUSCHE, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): To the residents of the Charles View housing complex west of Boston, it looks like any other 240-unit apartment building near a college campus. The difference, it was built with money from Google (NASDAQ:GOOG). Google (NASDAQ:GOOG) plugged $28 million into the Harvard area complex in 2011 as part of a tax credit program that has grown in popularity since the financial crisis.

FRED COPEMAN: The housing credit program is the last legitimate tax shelter, a way to manage your corporate tax rate, bring down your tax rate, increase your after-tax earnings.

TAUSCHE: It`s the low income housing tax credit, nicknamed LIHTC, it lets companies fund multifamily housing units like Charles View, buying credit from state governments for a fraction of their tax value, and then writing off the full value. In 2013, these LIHTCs cost an average 93 cents for a dollar of credit.

Because the government pays off this bond-like investment, there is no extra cost passed to the renter, hence how housing becomes affordable. Over the course of the three decades the policy has been in place, the program has cost more than an estimated $92 billion in tax revenues but built nearly 40,000 complexes. That`s one reason why it was one of the only tax credits that survived a recent volley of tax reform by Michigan Congressman Dave Camp.

(on camera): Banks and insurers are behind most of the new bills. By law, they must reinvest in areas they have branches and depositors. Many times, these are big cities. But other companies started chasing deals especially cheaper rural deals, after the recession. With interest rates near zero, CFOs searched high and low for yields and to do good.

Soon, companies like Apple (NASDAQ:AAPL), Verizon (NYSE:VZ) and United Healthcare found themselves in the housing industry.

(voice-over): Of the non-banks, Google (NASDAQ:GOOG) has been the most active doing more than a dozen deals since the crisis from Massachusetts to Iowa, to its home state of California.

Joe Hagan, who matches funds from companies with affordable housing developers, says Google (NASDAQ:GOOG) and other companies liked the tax credits social mission we the bottom line is, Hagan says, it has to have the right return.

A Google (NASDAQ:GOOG) spokesperson confirms the investments are led by its treasury department, and the company is doing more and more and getting what he called a healthy return. For residents like those at Charles View, that return means lower rent.

For NIGHTLY BUSINESS REPORT, I`m Kayla Tausche.

(END VIDEOTAPE)

MATHISEN: SeaWorld say the shares tank after reporting disappointing quarterly results. And that is where we begin tonight`s “Market Focus”.

The theme park operator missed on both the top and bottom lines and its forecasting a drop in revenue and earnings for this year compared to 2013. The company says its attendance was hurt by questions about its treatments of captive Orcas, or killer whales. The stock tumbled about 33 percent to $18.90. And that is its lowest level ever.

Deere`s profit slumped in its third quarter and the farming equipment maker is expecting weak sales ahead. It trimmed its outlook and will cut production. The stock was off by more than 2 percent to $84.49.

And the Canadian company, Canadian Solar (NASDAQ:CSIQ), rallied on strong earnings. The solar panel maker reversed a year-ago loss by posting a quarterly profit as it sold more of its products at higher prices. It also said it expected shipments to rise further in the current quarter. Shares were 24 percent higher to $31.03.

GHARIB: Fast-food chain Noodles & Company saw its shares slide right after its late earning report. It announced lower-than-expected quarterly profits, hurt partly by a drop in same-store sales. The stock was initially lower after-hours by as much as 18 percent. During the regular session, the stock was down slightly to $25.21.

Shares of AOL (NYSE:AOL) moved higher on its plans to raise $300 million through convertible bonds. This is the first time the company has issued bonds since it was spun off from Time Warner (NYSE:TWX) back in 2009. Now, there`s speculation that AOL (NYSE:AOL) is planning a big acquisition. The stock was slightly higher to $42.46.

And weak earnings and a lower than expected forecast for full-year profits pressured Myriad Genetics (NASDAQ:MYGN) today. The maker of diagnostic tests partly blamed the termination of its contract with insurer Horizon Blue Cross for the disappointing guidance. The stock tumbled 7 1/2 percent to $36.04.

MATHISEN: Well, you should expect to start paying more for your health care coverage, starting in 2015. A new study from the National Business Group on Health says the nation`s largest employers project health benefit costs will rise 6 1/2 percent next year, and they plan on shifting more of that increase on to employees. More than half the companies surveyed will increase the number of high deductible plans they offer to employees.

GHARIB: Well, as corporate America shifts more of its health care costs to its workers, many of the same companies are catering to big changes to their customer base. As we continue our series “Aging in America”, in part three tonight, we look how some companies and sectors are benefitting from a rapidly aging U.S. population.

Dominic Chu has the story.

(BEGIN VIDEOTAPE)

DOMINIC CHU, NIGHTLY BUSINESS REPORT CORRESPONDENT: When it comes to retirement, more Americans are choosing to control even more of their own destiny, including how they want to live out their days as they get older. Long gone are the days staying with your kids and grandkids was the only option.

DR. JILL SUMFEST, HUMANA SOUTH FLORIDA CHIEF MEDICAL OFFICER: We have services that address not only the senior but his or her spouse, family, caregiver, to give them the support they need, so that they know they`re not alone in taking care of the senior.

CHU (on camera): Of course, as the demographics of our nation change, so will the companies that stand to benefit. Senior living communities like this one are gaining in popularity as companies look to capitalize on the aging population.

(voice-over): Among the biggest companies in America that provide senior living communities are Brookdale Senior Living (NYSE:BKD) and Emeritus (NYSE:ESC) Corp. The two companies are actually in the process of merging, and that combo would be the biggest owner and operator of senior housing in the country, with nearly 113,000 units in over 1,100 communities.

Shares of both companies have staged tremendous stock market rallies over the course of the last five years.

LISA SNEDDON, SENIOR LIVING EXPERTS FOUNDER: The number one advantage of living in a senior living community is the socialization aspect. When you`re around other people, your brain is going to be more active. You`re going to be healthier.

CHU: Another option that`s growing in popularity is the use of home caregivers. Among the companies that provide those and other health services for the aging are the Ensign Group and Kindred Healthcare (NYSE:KND). Many Americans are opting for this option instead of going straight to retirement community.

JENNIFER TUCKER, HOMEWATCH CAREGIVERS VICE PRESIDENT: With the boomers being such an independent age cohort, they really are going to want to be aging in place on their own terms. And so, we really see that trend of, you know, using home care services just going up and up.

CHU: Many of the companies in these types of industries are already merging and consolidating with each other. That could be a sign that even more deal action could happen in the future, so investors may want to take note.

For NIGHTLY BUSINESS REPORT, I`m Dominic Chu in Cresskill, New Jersey.

(END VIDEOTAPE)

GHARIB: And tomorrow, the fun part of retirement — how one couple who saved wisely now has the time and money to enjoy themselves. It`s in the final part of our “Aging in America” series. That`s tomorrow.

MATHISEN: Coming up: it`s a bird, it`s a plane. No, it`s a classic Superman comic book and you never guess how much it is expected to sale at auction. That`s next.

(MUSIC)

GHARIB: Amazon (NASDAQ:AMZN) is taking direct aim at PayPal and Square coming out with its own credit card swiping payment devices called Amazon (NASDAQ:AMZN) Local Register. You can find it on a mobile app and brick and mortar stores. And Amazon (NASDAQ:AMZN) says it plans on charging small businesses lower fees than the other system. Shares of the online retail giant were up 2 percent today.

MATHISEN: And finally tonight, here is a chance for anyone to become a superhero, at least invest in a superhero comic book. But it will take a lot of money to do it.

Morgan Brennan reports.

(BEGIN VIDEOTAPE)

MORGAN BRENNAN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): Comic books aren`t just for kids, at least not the rare ones. Take “Action Comics #1”, the 1938 issue marks the debut of Superman and with him, the entire superhero genre. Fewer than 50 copies exist. And the last one to sell at auction owned by actor Nicholas Cage fetched an eye-popping $2.1 million in 2011, making it the most expensive comic ever sold. But starting this week, another copy is hitting eBay`s auction site, and experts think this one could set a new record.

DARREN ADAMS, PRISTINE COMICS OWNER: “Action Comics #1”, historically, is the most significant book of all comic books. Many consider it the Holy Grail.

BRENNAN: The market of rare comics is growing, as more investors approach it as a collectible asset class, like art or stamps.

VINCENT ZURZOLO: Probably 20 years ago, comic books weren`t seen in the same light as today. I think the advent of the movies, I think the increased visibility of comic book prices, realized prices at marketplace, have really helped to galvanize customers, bidders, people looking for alternative investments to find comic books.

BRENNAN: Zurzolo`s auction house Metropolis is gearing up for a big offering of its own. Early issues of the “Detective Comics” where Batman made his debut from the personal collection of creator, Bob Kane, are expected to fetch six figures a piece.

And it`s not just books. Comic art and sketches have been commanding super sums, as well.

AUGIE DE BLIECK, COMIC BOOK RESOURCES COLUMNIST: The biggest price was about $600,000, $650,000 a couple years ago for Todd McFarlane, “Amazing Spiderman” cover. Those prices have definitely been going up.

BRENNAN (on camera): But buyer beware, collectors warn the majority of comic books don`t actually turn a profit. Many depreciate in value, worth dollars or mere pennies. The key is collecting rare issues focused on the debut of a famous character or important plot twist and the older, the better. The 1930s and `40s are considered the golden age of comics.

(voice-over): Also important, the books need to be in descent condition, no touchups, sealed in plastic and don`t think about giving it a read.

For NIGHTLY BUSINESS REPORT, I`m Morgan Brennan.

(END VIDEOTAPE)

GHARIB: Did you see the cover price on those, 10 cents? And now —

MATHISEN: Add to $2.1 million.

GHARIB: Now, they are going for millions.

That`s NIGHTLY BUSINESS REPORT for tonight. I`m Susie Gharib.

We want to remind you, that this is the time of year your public television station seeks your support.

MATHISEN: I`m Tyler Mathisen. On behalf of your public TV station, thank you for your support. And we hope to see you right back here tomorrow night.

END

Nightly Business Report transcripts and video are available on-line post broadcast at http://nbr.com. The program is transcribed by CQRC Transcriptions, LLC. Updates may be posted at a later date. The views of our guests and commentators are their own and do not necessarily represent the views of Nightly Business Report, or CNBC, Inc. Information presented on Nightly Business Report is not and should not be considered as investment advice. (c) 2014 CNBC, Inc.

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